Nationwide retail transaction volumes have declined 18.7 percent in the first half of 2017, but despite activity slowing more than $27 billion of trades occurred, according to JLL’s mid-year 2017 Investment Outlook report.
Overall, retail remains healthy with vacancy holding at 4.9 percent and rents rising by 5 percent, the report said. Retail investors are more conservative in their investment strategies due to the uncertainty from analyst negativity, said Naveen Jaggi, President of Retail Brokerage and Capital Markets at JLL in a statement.
“The true level of e-commerce disruption is still a bit murky, so investors are waiting it out on the sidelines until a clearer picture emerges. In the interim, we still expect large, marquee deals to transact, while smaller low-return deals will continue to face challenges,” said Jaggi in a statement.
In the past few years, we have seen investors cautiously tread into new retail territory by opening their purview to less conventional secondary and tertiary markets, which have an abundance of available retail product. Now, REIT and institutional investors are sticking closer to what they know and return to strong markets with less risk. However, private capital remains interested in these other secondary and tertiary markets where transactions reached $2.1 and $1.9 respectively.
Private investors are also the ones driving liquidity in struggling retail markets, by scooping up malls and power centers that long-term institutional and REIT investors are putting on the market. REITs are institutional capital are right-sizing their retail holdings, focusing on core assets and aggressively acquiring other well-performing assets.
Risk aversion remains the norm in retail, even in grocery-anchored assets. A broad opposition to risk across all retail product types, which includes grocery-anchored shopping centers. Typically one of the more stable retail investments, the sector is now seeing a wide gap in pricing between A and B/C grocery-anchored product. The change in appetite for grocery stores are still seeing aggressive pricing and cap rates between 5 and 7 percent.
“Investors are likely going to streamline their profiles this year, but retail is a cyclical business and disruption fears will diminish over time and appetite for risk is expected to normalize in the back-half of 2018,” Jaggi said in a statement.
Taking a look at the retail market in Chicago, a report from Marcus & Millichap says the market is tightening and limited supply is setting up the market for increased rent growth. Rising absorption combined with falling construction pushed first quarter vacancy to 7.5 percent, the lowest level since 2007. Consumers’ desire for top of the line grocery stores has fueled the growth of Whole Foods and Mariano’s in Chicago and its suburbs. In addition, Cermak Produce signed one of the largest leases this year for 89,000 square feet in Aurora.
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